Canada best place in G8 to pay business taxes

Process has gotten less cumbersome, but some say there's still room for improvement

Lowering business taxes was part of the economic action plan launched by Finance Minister Jim Flaherty, pictured above in 2011, in his 2009 budget. A study of tax regimes of 185 economies ranked Canada in the Top 10 in terms of the amount of tax medium-sized businesses pay and the ease of paying it. (iStock)

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You may not like paying taxes, or approve of how Ottawa spends the tax revenue it collects, but if you're a business owner, you have it better than your counterparts in other G8 countries, according to a recent study measuring how easy it is to pay corporate taxes.

The study was done by accounting firm PwC, the World Bank and the International Finance Corporation.

For the eighth year, it looked at the tax regimes of 185 economies and considered three factors:

How much a medium-sized business pays in taxes as a percentage of profit.

How much time it takes a business to compile returns and submit tax payments.

How many tax payments a businesses makes per year.

It used a fictitious sample business to calculate its results, making a set of standardized assumptions about the number of employees (60), years in operation (2), profits (gross pre-tax margin of 20 per cent), losses (makes a loss in first year of operation) etc.

Canada ranked eighth overall, up from 28th in 2010. Its representative business made eight tax payments a year, spent 131 hours compiling and filing returns over those 12 months and paid 26.9 per cent of its profit in taxes, a sharp drop from the 49.1 per cent paid in 2004.

Ease of paying business taxes - selected rankings

Country

Rank

Tax payments per year

Tax paid as proportion of profit

Canada

8

8

26.9%

United Kingdom

16

8

35.5%

France

53

7

65.7%

United States

69

11

46.7%

Germany

72

9

46.8%

(Source: PwC)

United Arab Emirates was ranked the best and Venezuela the worst on the scale of relative ease of paying taxes.

Easier tax law compliance tends to correlate with better economic growth, according to Jason Safar, a tax partner at PwC's offices in Hamilton, Ont.

Over the eight years that PWC has done the study, it has noticed that across all of the countries sampled, GDP goes up, on average, as the difficulty of paying taxes goes down.

"There's a correlation between growth in the economy and easing the tax payment process," Safar said.

And GDP growth, he says, is pretty much bound to bring with it more jobs.

"You don't achieve that growth usually without more people being involved in productive activities," he said.

System could be even easier

Canada has made some improvements to its corporate tax system in the past few years, but complying with the rules is still no simple task, said Maureen Liviniuk, CEO of Edmonton-based Liviniuk Group, which provides accounting services to small- and medium-sized firms.

"I don't know any small business owners that would tackle a corporate tax return on their own," she said.

Liviniuk, who's also a director of Alberta Women Entrepreneurs, a support group for women in business, says the most significant improvement has come from business owners themselves, as they embrace technology, especially online processing of returns and remittances.

She was surprised that the PwC study found that businesses make only eight tax payments a year. In her experience, that number is much higher.

'I don't know any small business owners that would tackle a corporate tax return on their own.'— Maureen Liviniuk, CEO, Liviniuk Group

When payroll remittances, GST filings and, possibly, monthly tax instalment payments to federal and provincial governments are counted, it's more like 20 to 30 payments a year, she said.

And tax audits, when they happen, can be "very unproductive," said Liviniuk.

"It seems to take CRA (Canada Revenue Agency) a long time to complete an audit, going back and forth a number of times, asking for information that they may already have or should already have," she said.

Taxes a time suck for businesses

What's more, some cost-saving changes made recently by the CRA have not been helpful for business owners.

For example, the agency has switched to having tax audits conducted from any tax centre across the country, rather than one in the same jurisdiction as the business being audited. That means an auditor in Newfoundland could be assigned to handle an audit on an Alberta business.

The distance and time difference associated with that match-up often end up taking up more of the entrepreneur's time.

"It seems to be working well for the CRA, but it doesn't work well for the business owner," Liviniuk said.

The strongest correlation between higher GDP and ease of tax compliance, Safar says, was not with a lower tax rate but with less complexity.

Safar says it only makes sense that having entrepreneurs spend less time figuring out how to pay their taxes should be good for business activity.

"Paying taxes, and sorting out taxes, tends to be non-productive time," he said. "It's not time that can be spent making your business better, so to the extent that you can free that up, it has to be good for the business."